Learn how to calculate the impact of NPS on the CAC and LTV ratio [Calculator]

14 min

Have you ever stopped to think about how to justify an investment in NPS and satisfaction surveys, and what the real impact it brings to your company or business?

In that article, I will present you with tools and arguments to justify the investment in Customer Experience, and how to definitely convince your director of CX to apply a customer-focused vision.

At the end of the article, I will help you answer the following questions:

  • What are indicators justify this investment?
  • How to convince my board to invest in Customer Experience?
  • What is the financial impact of having a good grade NPS?

Before everything, I will start from the premise that you have already read our article, What is NPS (Net Promoter Score) and already managed to understand this customer satisfaction metric that is used by two thirds of Fortune 1000 according Geoff Colvin in a recently published article.

Therefore, to understand the financial impact of NPS in your company, we have to understand the concepts of LTV (Lifetime Value) and CAC (Customer Acquisition Cost).

What is LTV? or Lifetime Value or Customer Value

It is a metric used by a company's marketing and sales to measure the potential future profit generated by a customer. Thus defining, the value of a customer throughout their relationship with the brand.

LTV ou Lifetime value, what is the value of a customer?

Let's put these concepts in a practical example. Imagine you have a Cafeteria, and you need to know how much each customer has a financial impact on your business. We will use the following information:

Average ticket: Add the total sales value, and divided by the number of customers. Example: R$15,00
Purchase Frequency: How often does a single customer buy from you over a period. Example: 2x per week
Lenght of stay: What is his total period of stay as his client. Example: 3 years
Contribution Margin: What is the profit margin of your business. Example 10%

Use the calculator we developed especially for you to set up this simulation. Feel free to adapt according to your reality:

Calculator

Detrator Neutral District Attorney
Average ticked at each visit
Number of visits / week
Number of visits / year

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Customer value in the year

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Customer stay time (year)
Profit margin / customer (%)
Profit margin / customer (R$)

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0

LTV

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Following the NPS metric, we will divide our customers between Detractors, Neutral and Promoters. Getting the following scenario:

Detrator: R $ 10 average ticket * 1 visit / week * 1 year as a customer * 10% margin = LTV de R $ 52.00

Neutral: R $ 15 average ticket * 2 visits / week * 3 years as a customer * 10% margin = LTV de R $ 468.00

District Attorney: R $ 18 average ticket * 3 visit / week * 5 years as a customer * 10% margin = LTV de R $ 1,404.00

Thus, we have already noticed the relevance that a Promoter client has in relation to Detrators (+2.700). Even so, let's continue…

What is the impact of NPS on your LTV?

Now let's set up scenarios to see what each conversion of your NPS causes impact on your LTV, in other words, how it affects your billing. Also check out a Harvard Business Review article addressing this topic.

What is the impact of NPS on LTV?

For example, in our Cafeteria, let's imagine that we apply a satisfaction survey to segment our customers, using NPS metric. We made three measurements: Janeiro, February and March.

In January, we identified a scenario with 60 Promoter clients, 20 Neutral and 20 Detractors. And just based on that research, we already noticed some points:

  • We identify the customer
  • We understand the problem
  • We put together an action plan
  • We fixed the problem

Yet, after our action plan and the result of our February survey, we noticed that we had converted a customer from Detrator to Neutral, getting the relationship 60 / 21 / 19. And in March, we convert one more, for the relationship of 61 / 20 / 19. That is, that our Detrator client, is now a Promoter client!

We will use our simulator below to set up this scenario and evolve our NPS in 1 point based on our actions:

LTV

Detractors Neutral Promoters
Period 1 Period 2 Period 3
District Attorney
Neutral
Detrator
NPS

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General LTV

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Evolution of LTV (%)

0%

0%

Evolution of LTV (R$)

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The result was a growth of 0,44% converting a customer to Neutral, and 1,43% for Promoter. That is, this our action plan, made our LTV go up R $ 13.52 increasing only 1 point in our NPS.

That would be a good argument to start a discussion with your CX director is not true? But we will nourish you with more arguments.

Before continuing, I invite you to access this complete content on video! It was originally created byTiago Serrano, CEO of SoluCX for theWebinar: NPS EconomicsRegister here and receive it in your email

Webinar NPS Economics

What is CAC? or Customer Acquisition Cost or Customer Acquisition Cost and what is the impact of NPS under this metric

It is the sum of all costs to win each new customer, divided by the number of customers won. That is, everything you spent on attracting visitors, lead nutrition and purchase closing.

CAC Customer acquisition cost, What is?

Let's understand now, to 1 influence of NPS on CAC, and understand the his impact on your LTV.

When you have a Promoter client, it will naturally bring new customers to your business for free. That is, it will indicate being service to a friend, family or even will invite you to join you over a coffee. The immediate consequence, is that the Promoter customer drops its customer acquisition cost (CAC). Because only for the quality of the service provided, makes you invest less in acquiring new customers.

Already a Detrator customer, beyond the shorter lifecycle as your customer, will make you invest even more in advertising, sponsorship and brand investments, to convince you to buy with you. Consequently increasing your CAC.

The relationship between LTV and CAC

Lastly, let's do the LTV relation over the CAC. That is, how much a customer means to your brand, dividing by how much you spent to acquire it as a customer.

What is the relationship between LTV and CAC

You can also ask. But what's a good LTV and CAC ratio?

On a SaaS business benchmark, a good relationship between LTV and CAC was found around 3, where something below that already becomes a high risk, and above 6, an opportunity for rapid growth and business expansion. Below 1, your business is making a loss!

From the same point of view, recently a article by Exponea, and it was seen that in American retail in the year 2018, the LTV / CAC average was at 0,66. That is, many companies were spending more to acquire a new customer, of what he brought back to the brand. On the other hand, the good companies had LTV / CAC of 4 e as Top of Minds, with an index above 6.

Therefore, returning to our Cafeteria example, and considering the LTV of our scenario used in our calculator, the comparative result between Detratores customers, Neutrals and Promoters, applying the same CAC of R $ 100.00. The relationship of a Detrator customer is 0,52. For Neutral we obtained a relationship of 4,68 and for the Promoter client, our LTV / CAC stood at 14.04.

Use our LTV over CAC simulator, according to the reality of your business.

Detrator Neutral District Attorney
LTV
CAC

LTV / CAC

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In short, if you want to keep your coffee shop with the doors open, identify your detrimental customers, and set up an urgent action plan. Because it will make you spend more to acquire it, of what will bring real return to your business.

Concluding…

You now have the following skills to approach your CX director:

  • What is NPS, and the importance of identifying Detractor customers, Neutrals and Promoters.
  • Know what LTV is, and the impact that NPS has on your customer’s life cycle.
  • What is CAC, and that a Promoter client makes you spend less on acquiring new clients.
  • Know that the relationship between LTV and CAC are directly linked to the NPS of your business.

At the beginning we asked:

  • What are indicators justify this investment?
  • How to convince your board to invest in Customer Experience?
  • What is the financial impact of having a good grade NPS?

Therefore, now that you have arguments, come to your director and ask:

“Boss, what do you think about increasing our company's revenue by applying the vision of Customer Experience?

Alex Pereira is content and communication coordinator at SoluCX

And that content was originally created by Tiago Serrano, CEO of SoluCX for the Webinar: NPS Economics. Want to receive the full video content? Register here and receive it in your email

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